Investors and regulators require more robust operating infrastructure across all levels of a hedge fund’s business. Emerging managers in particular are more likely to provide greater transparency. Further highlights include:

&bull; Expenses charged to the fund come under more scrutiny – 64% of respondents will investigate miscellaneous expenses and may place limits. Investors have little tolerance for expenses such as employee compensation, marketing and non-research related travel being charged to the fund. &bull; The vast majority of ODD teams are willing to provide feedback to managers to enable an investment – While 65% of responding investors have the right to block an investment entirely, 81% are willing to take a consultative approach to allow a manager to remedy a stated deficiency and re-engage with the investor. &bull; Outsourcing of key functions is a more accepted practice for emerging managers – 68% of respondents were willing to invest with emerging managers. Investors are slightly more likely to veto an emerging versus established manager (9% veto rate versus 6%), and will spend more time reviewing daily operations and speaking with senior management including the CIO and fund directors. However, they are more accepting of outsourcing key functions. &bull; Valuation is in sharp focus for 38% of responding investors in 2014 – Valuation concerns were a top five reason investors issued a veto over the past year. All the respondents (100%) indicated they will review a fund’s valuation policy during the ODD review and 78% stated they will verify the valuation procedure during the on-site review. &bull; Hedge fund compliance and regulatory frameworks are of critical importance – 73% of investors will increase their focus on compliance and regulatory frameworks in 2015. In the face of a challenging cross-border regulatory environment, investors must understand how managers will mitigate the risk posed by registration, reporting and the exams required by regulators.

Scott Carter, Deutsche’s co-head of Global Prime Finance &amp; Distribution, Americas, said: “Investors increasingly access hedge funds as part of a broader set of portfolio solutions, which deliver superior risk-adjusted returns. With this comes an expectation for robust operational controls and we are seeing hedge funds successfully respond to these demands.”

The survey polled 70 investor entities globally with a hedge fund allocation in excess of US$730 billion, including consultants, endowments, public pensions, government organisations, insurance companies, funds of funds, private banks and family offices. Seventy-two percent of respondents manage more than US$1 billion in hedge fund assets under management. &ndash; July 2014

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